Name _________________________
ID #_________________________
ACCOUNTING 15.501/516
FALL 2003
MIDTERM I
EXAM GUIDELINES
1.
This exam contains 8 pages, in two parts. Please make sure your copy is not missing any
pages.
2.
The exam must be completed within 80 minutes.
3.
The total number of points in this exam is also 80, so budget about 1 minute / point.
Avoiding spending too much time on any one question.
Question
I
II
Topic
Recording the effects of transactions: William’s Merchandize Distribution
Accounts receivable, inventories, and cash flow: Abercrombie & Fitch
Points
30 50 4.
Please work the problems in a clear, readable manner and show all computations. We
will not grade what we cannot read.
5.
If you feel that assumptions are necessary to solve a problem, please state your
assumption and why it was necessary.
6.
Calculators may be used for computations on this exam.
7.
Good luck.
Page 1 of 8
QUESTION I: TRANSACTIONS: WILLIAM’S MERCHANDIZE DISTRIBUTION (30 POINTS)
William’s Merchandize Distribution (WMD) is a wholesale grocery distributor. Using the Balance Sheet Equation worksheet
provided below, record the effects of the transactions shown on page 6 (2 points each). Calculate the ending balances of each account
when you are done recording the transactions (2 points). Compute net income for the year ended December 31, 2002 (2 points).
1/1/2002
Balances
Cash
Receivables
Inventories
Prepaid
Rent
150,000
95,000
896,000
51,000
Property, at
Current
Cost, Less
Liabilities
Accum. Depr.
1,372,000
988,000
Noncurrent
Liabilities
Contributed
Capital
Retained
Earnings
579,000
240,000
757,000
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
12/31/2002
Balances
Net Income for the period ended December 31, 2002:
Page 2 of 8
R/E
Explanation
QUESTION II: ABERCROMBIE & FITCH (50 POINTS)
Abercrombie & Fitch (A&F) is a large and growing retail chain of 597 stores in the U.S (adding 112
stores in the last year). The last two pages of this exam contain the balance sheets and income
statements from A&F’s February 1, 2003 annual report to shareholders (with minor modifications).
ACCOUNTS RECEIVABLE AND REVENUE RECOGNITION (15 POINTS)
1. As a retailer, A&F has only a minimal amount of accounts receivable, as shown on the balance
sheets. Nevertheless, assume that the company wrote off $1,160k in uncollectible receivables in the
year ended February 1, 2003. Reconstruct plausible transactions to record these write-offs and the
recognition of bad debt expense in the Balance Sheet Equation for the year ended February 1, 2003.
(6 points)
2. A&F has a policy that allows customers to return merchandise within 14 days for a full refund.
Assume the company estimated that at the fiscal years ended February 1, 2003 and February 2,
2002, expected returns to be $3,500k and $2,900k, respectively. These amounts (allowances for
returns) have been included in “Accrued Expenses” on the balance sheets. If A&F had not recorded
these allowances for returns, estimate the following items: (ignore the effect of income taxes)
a) Retained earnings on February 1, 2003 (3 points)
b) Net income for the year ended February 1, 2003 (3 points)
c) Cash on February 1, 2003 (3 points)
Page 3 of 8
INVENTORIES (15 POINTS)
3. Compute the value of inventory purchased in the year ended February 1, 2003. (3 points)
4. a) Compute the inventory turnover ratio (COGS / average inventory) for the fiscal year ended
February 1, 2003. (1 points)
b) The notes to A&F’s financial statements indicate that the company uses the FIFO cost flow
assumption. Given this information, what adjustments, if any, would you make to the turnover
ratio you calculated in part (a) in order for the ratio to be a good estimate of physical turnover.
(A qualitative response is all that is expected here. 3 points)
5. a) Suppose that A&F had used the LIFO method instead. Assume that the LIFO inventory values
would have been $89,000k and $57,000k on February 1, 2003 and February 2, 2002,
respectively. Compute the cost of goods sold that A&F would have reported had it used LIFO
instead of FIFO. (5 points)
b) Compute the cumulative amount of taxes that A&F would have saved by using the LIFO
method. Assume a tax rate of 35%. (3 points)
Page 4 of 8
CASH FLOWS (20 POINTS)
6. Shown below is the first portion of A&F’s Statement of Cash Flows (indirect method) for the year
ended February 1, 2003. Provide four other adjustments in the Operating Activities section of the
statement. Be sure to indicate the direction of the adjustment (add or substract). (Note: Marketable
securities are not an operating asset.) (8 points)
000’s
Net income
$194,335
Add: depreciation
$56,925
7. For the year ended February 1, 2003, A&F reported Investing Cash Flow of –$26,802k and
Financing Cash Flow of –$42,973k. Using this information and the balance sheets, compute
Operating Cash Flow for the year ended February 1, 2003. (3 points)
8. Provide your qualitative assessment of A&F’s ability to generate cash flows. (3 points)
9. Assume that “Accounts Payable” relates entirely to inventory purchases. Estimate the amount of
cash A&F paid for inventory purchases in the year ended February 1, 2003. (6 points)
Page 5 of 8
TRANSACTIONS FOR QUESTION I
1.
During 2002, the company purchased $6,320,000 of groceries on account.
2.
The company made $7,900,000 of credit sales to grocery retailers during 2002.
3.
On June 30, 2002, the company prepaid $108,000 for one year of store rental.
4.
The company had beginning accounts payable of $430,000 on January 1, 2002 and
accounts payable of 445,000 on December 31, 2002. Record the cash payments, noting
that accounts payables were increased by transaction 1.
5.
On December 15, 2002, a consulting firm issued a report stating that the "WMD" brand
name has declined in value by $500,000 because of negative associations with
“Weapons of Mass Destruction.” WMD had no brand name asset recorded on its
December 31, 2001 balance sheet.
6.
WMD collected $7,820,000 from customers during 2002.
7.
During 2002, the company paid debt holders $67,000 for interest incurred in the year.
8.
The company declared and paid $42,000 of dividends.
9.
WMD employees took a physical count of inventory on December 31, 2002. The cost of
goods in the company's possession on that date was $929,000. The cost of goods in the
company's possession on January 1, 2002 was $896,000.
10.
During 2002, the company paid its employees $1,230,000 in wages and benefits for
work performed in 2002.
11.
The last payday for the company was December 30, 2002. Employees had earned, but
the company had not yet recorded, $4,000 of wages for work done on December 31,
2002.
12.
Adjust for the unused rent at December 31, 2002. Note that Prepaid Rent on January 1,
2002 was 51,000 and that Food Lion never prepays rent for more than one year.
13.
WMD calculates that $70,000 should be recorded as depreciation on its warehouses and
machinery.
Page 6 of 8
Abercrombie & Fitch
BALANCE SHEETS
(Thousands)
February 1
2003
February 2
2002
$391,035
10,000
$167,664
71,220
10,462
20,456
144,218
45,441
601,156
392,941
725
$994,822
108,876
36,979
405,195
365,112
239
$770,546
$ 50,153
120,438
40,879
211,470
20,781
13,044
$ 31,897
109,586
22,096
163,579
1,165
10,368
1,033
142,577
714,475
858,085
(108,558)
749,527
$994,822
1,033
141,394
519,540
661,967
(66,533)
595,434
$770,546
Assets
Current Assets
Cash and Equivalents
Marketable Securities
Receivables, net of allowance for doubtful accounts
of $900 and $1,300, respectively
Inventories
Store Supplies and Other
Total Current Assets
Property and Equipment, Net
Other Assets
Total Assets
Liabilities and Shareholders’ Equity
Current Liabilities
Accounts Payable
Accrued Expenses
Income Taxes Payable
Total Current Liabilities
Deferred Income Taxes
Other Long-Term Liabilities
Shareholders’ Equity
Common Stock – $.01 par value: 150,000,000 shares
authorized, 97,268,877 and 98,871,478 shares outstanding
at February 1, 2003 and February 2, 2002, respectively
Paid-In Capital
Retained Earnings
Less: Treasury Stock, at Average Cost
Total Shareholders’ Equity
Total Liabilities and Shareholders’ Equity
Courtesy of U.S. Securities and Exchange Commission. Used with permission.
Page 7 of 8
Abercrombie & Fitch
STATEMENTS OF INCOME
For years ended
(Thousands)
Net Sales
Cost of Goods Sold
Gross Income
General, Administrative and Store Operating Expenses
Operating Income
Interest Income, Net
Income Before Income Taxes
Provision for Income Taxes
Net Income
February 1,
2003
$1,595,757
939,708
656,049
343,432
312,617
(3,768)
316,385
121,450
$ 194,935
February 2,
2002
$1,364,853
806,819
558,034
286,576
271,458
(5,064)
276,522
107,850
$ 168,672
February 3,
2001
$1,237,604
728,229
509,375
255,723
253,652
(7,801)
261,453
103,320
$ 158,133
Courtesy of U.S. Securities and Exchange Commission. Used with permission.
Page 8 of 8